UK inflation is likely to fall in 2023 (but low-to-zero growth is expected)

The UK economy will not experience a technical recession in 2023, while inflation is likely to fall, says a new report.

The UK’s economy may have avoided recession but there is little cause for optimism for 2023. (Photo by pitchr/Shutterstock)

The UK narrowly avoided recession in 2022, and the most recent forecasts suggest low and stagnant growth for the near-term future, with the UK ultimately avoiding a technical recession that appeared inevitable in November when the country was still reeling from the impact of the Liz Truss government’s ‘mini-budget’.

While inflation is forecast to fall, it is unlikely to be a smooth path to the 2% target, despite this currently being forecast by the Bank of England, according to a new report from Teneo, an economic advisory company.

“Our view is grounded in a belief that structural challenges to the UK economy, including an ageing population, wage pressures driven by inflation and a tight labour market, and energy price pressure in the second half of 2023 mean inflation proves more challenging to unwind,” it stated.

Several factors are currently easing the downward pressure on the UK’s forecast gross domestic product: a warmer-than-expected winter and Europe sourcing alternative energy supplies. As a result, the UK interest rate is expected to peak at 4.5%, rather than the 5% previously forecast. China’s reversal of its zero-Covid policy will likely bring relief to supply chain bottlenecks too.

Meanwhile, some expect inflation to persist in 2023 and beyond. The reasons for this are an ageing population leading to net attrition in the workforce, rising labour input costs, significant pressure on wage hikes driven by strikes and general labour market tightness, and the potential for energy prices to rise in the final quarter of 2023 due to Europe being unable to build up reserves, along with increased energy demands from China.

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